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The efficiency effects of life settlement on the life insurance market

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  • Seog, S. Hun
  • Hong, Jimin

Abstract

We investigate the effects of life settlement, the securitization of life insurance contracts, on the primary insurance market. We analyze an economic model in which policyholders have different liquidity risks in an overlapping generation setting, and both policyholders and the monopolistic insurer incur liquidity costs. We find that, under some conditions, life settlement may lead to an increase in the insurance demand and a decrease in financing costs. The insurer will have a higher profit when the decrease in financing costs or the increase in demand is sufficiently large. Our findings imply that settlement can enhance the efficiency of the insurance market, which is in contrast with the existing theoretical studies on settlement.

Suggested Citation

  • Seog, S. Hun & Hong, Jimin, 2019. "The efficiency effects of life settlement on the life insurance market," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 395-412.
    • Handle: RePEc:eee:pacfin:v:56:y:2019:i:c:p:395-412
    DOI: 10.1016/j.pacfin.2019.06.012
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    2. Kung, Ko-Lun & Hsieh, Ming-Hua & Peng, Jin-Lung & Tsai, Chenghsien Jason & Wang, Jennifer L., 2021. "Explaining the risk premiums of life settlements," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).

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    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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